From time to time, I spot a stock in the FTSE 100 or FTSE 250 that has a dividend yield around 10%. A double-digit yield is rare, with it usually falling lower due to share price movements or dividends being cut. Yet over the past year, I’ve noted the rise of ultra-high-yield stocks that have yields in excess of 10% and have stayed that way for an extended period of time. Are they still too good to be true or should I invest?
Incredible potential
For my examples, I’m going to look at two particular stocks. The first is Persimmon (LSE:PSN), the UK homebuilder. The sector is known for paying out generous dividends due to good cash flow and high profit margins. Yet over the past year, the dividend yield has ranged from 10% up to almost 21%, with it currently at 16%.
The other example is Ferrexpo (LSE:FXPO), the commodity giant. Again, the dividend yield hasn’t fallen below 12% in the past year and is currently at 15%. This means that if I had bought the stock a year ago, I’d have actually received a double-digit percentage yield.
If I believe that both stocks can continue to pay out income in the same measure over the next year, I could make some serious money from even a relatively modest intial investment.
The elephant in the room
So what’s the sting in the tail? Well, even though the yields have remained very high for a period of time, the share prices have been falling. Persimmon is down 39% over the past year, with Ferrexpo performing even worse, down 47%.
This is the large problem facing investors like myself. Noting the yield is one thing, but when I do more research, I uncover dismal share price performances. Simply put, the losses from my initial capital would completely wipe out any benefits of the income received.
Both stocks have fallen for valid reasons. The UK property market is nowhere near as strong as it was a year ago, with high interest rates making mortgages hard to come by. For Ferrexpo, the war in Ukraine has really hampered operations, particularly with regards to iron ore.
Putting my money to work
I feel it’s too much risk for me to warrant putting a lot of money in either stock right now. The businesses on the face of it seem to be juicy buys and could bounce back strongly. But there’s a lot to worry about below the surface.
The only way I can justify an investment is if I feel the share price has reached close to the bottom. Then my losses from my capital should be minimised. My other assumption would be that the dividend per share doesn’t get cut over the next year, provided the business financials hold firm.
Ultimately, I’m not confident in either assumption for the two above ideas. I’ll be sticking to more sustainable lower-yielding stocks for the time being.
